Software-as-a-service (SaaS) startup companies show a growing interest in venture capital (VC). However, many business owners struggle to develop their brands under certain VC investors. As the desire to boost brands with VC rises, several new methods exist to prevent bad business with ill-equipped investors.
Always Do Reference Checks
It’s crucial to do reference checks and discuss the number of founders an investor is interested in. It’s occasionally said that one should talk to failures rather than victors to understand the VC properly. While this tactic may be helpful, conversing with other founders could offer supplemental insights.
Founders may also possess a tighter grasp of the VCs that invest in them. It’s essential to approach each conversation with an open mind and few expectations. This tactic could present new information on investors you are interested in, allowing you to make a more informed decision.
Ask for Additional Checks
It’s essential to ask investors to share the number of investments they wrote that require additional checks. Most SaaS success stories had bumps in the road along the way. Some VCs may offer more money than others, and knowing how many obstacles disrupted the path could be beneficial. You may ask them to share the number of reserves they hold per investment and subsequently learn that multi-billion-dollar firms tend to have a one-to-two ratio.
This means they may earmark an additional dollar for each item they initially put in. The consensus is that VCs who don’t write additional checks are less valuable because supplemental checks are often necessary.
Identify Control
While control isn’t as significant to VCs as it once was, it’s good to know where they stand. Nowadays, it’s widespread for VCs to abandon the partnership when they think things aren’t going well. Ultimately, concerns should be focused more on an investor pushing you out rather than whether or not they want complete control.
Discuss Long-Term Goals
When discussing plans early on, ask your investors where they hope to be in ten years. VC tends to have constant turnover, and investors will be removed unless they deliver returns. Simply asking if they plan to be around in the next decade could give you an idea of their commitment to the partnership and investment.
Ask About Potential Challenges
VCs can face complications, and identifying those difficulties is integral to the investment process. Ask them to share their most challenging experience and what they potentially learned from it. As valuable as this question is, not many will ask it, making it increasingly likely that you’ll receive a genuine response.
Discuss Potential Outside Collaborations
One of the many unspoken rules in VC investments is that the larger the fund, the more likely investors are to bring in additional CEO collaborators from the outside. Investors with considerable funds possess ‘benches’ waiting for a signal to supervise their portfolio companies. Ask if the investor introduced outside collaborations and, if so, how many there may be.
Identify Their Investment Failures
Along with challenges, there are bound to be a few failures. Many investors have some form of fraudulent activity present within their portfolios. These cases of “micro-fraud” may seem insignificant, but it’s essential to identify their worst investments before collaborating with them. Most investors can quickly highlight their most significant defeat. Their answer could humanize them while also revealing their values and concerns.
Inquire About Their Best Investments
Investors work with a seemingly endless number of CEOs throughout their careers. Learning which garnered the most respect could help you forecast your partnership with them. Their favorite CEO may not always have led to the most significant exit. This inquiry may give additional insight into the investor’s values and goals.
Don’t Stress About Non-Disclosure Agreements (NDAs)
Most VCs refuse to sign NDAs, and many founders find this a cause for concern. These investors meet with hundreds of startups annually while receiving thousands of unwarranted inbound requests for partnership. The bottom line is that VCs have no plans to take your ideas and propose them elsewhere because there’s no time to. Asking about an NDA could diminish an investment opportunity before it properly takes off.
The Future of VC Investors in SaaS
When going from a bootstrap company to partnering with a VC investor, it’s crucial to recognize the subtle differences. Bootstrapping often takes longer on average. Not everyone will succeed because VC makes up a small portion of private equity. 99% of startups won’t be able to raise venture capital regardless of how successful the business endeavor may seem.
If you’re willing to commit, prioritizing business models set up for success could empower you to expand into sectors where competition is practically nonexistent. An investment with a rare competitive nature could be the answer to your company’s growth.
